Auditing principles project

Overview

For this project, you will focus on performing due diligence to determine the viability of a client before deciding to engage with them. Sound client acceptance procedures can help CPA firms identify potential problem clients before formally engaging with them. In addition, for this project, you will outline the scope and objectives of an external audit and ensure you have an adequate audit team to execute the audit.

Scenario

The partner at your CPA firm has asked for your help to evaluate prospective clients that the firm is interested in auditing. Using knowledge of Generally Accepted Accounting Standards (GAAS), best practices, and risk assessment techniques, you will evaluate a client through a due diligence process and identify the objectives and scope of the audit for this client. Additionally, you will identify key risk factors that could impact the client, and you will assess your audit team to determine if they can objectively meet the needs of the audit for the client.

Directions

From the list of prospective client companies provided in the

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Supporting Materials

section, select one company’s Form 10-K to perform an analysis. You will identify any account irregularities or other risk factors (red flags) within this analysis. You will outline the specific areas to be evaluated (objectives and scope), and you will use data in the company’s public statements to determine the risk factors in each evaluation area.

You will then assess your audit team by completing the

Audit Team Due Diligence Professional Care Checklist

Template supplied in the

What to Submit

section to ensure the team is qualified to perform the audit. Once your checklist is complete, you will communicate any findings within the

Client Risk Profile

Template. Consult the PCAOB Auditing Standards AS1005, AS1010, and AS1015 for guidance.

Finally, using the

Client Engagement Letter

sample found in the Supporting Materials section and the Engagement Letter Template found in the What to Submit section, you will summarize the engagement roles and responsibilities of the company you’ve selected to perform a 10-K analysis and create an engagement letter for that client. Consult PCAOB Auditing Standard AS16 Appendix C for guidance.

Apply client due diligence to determine if potential client is viable. Include the following:

Client management’s integrity

1. Client management’s commitment to Generally Accepted Accounting Standards (GAAS)

Financial strength of the client

Identify risk factors for the external audit. Include the following:

1. External factors
2. Other factors
3. Identify the objectives and scope of the external audit. Include the following:
4. Associated deliverables

Data type to be investigated

Tests to be performed

1. Assess due professional care of the proposed audit team. Include the following:
2. Technical competency
3. Independence (lack of bias)

Professional skepticism

Summarize the engagement roles and responsibilities of the external audit. Include the following:

1. Scope of audit
2. Auditor responsibilities
3. Client responsibilities
4. Cost of auditing services

Timeline for auditing services

What to Submit

1. To complete this project, you must submit the following:

Client Risk Profile

2. Using the Project One Client Risk Profile Template, produce a profile using Microsoft Word. Include references cited according to APA style.

Audit Team Due Diligence Professional Care Checklist

Complete the

Project One Audit Team Due Diligence Professional Care Checklist Template

using Microsoft Word.

Client Engagement Letter

1. Using the Project One Engagement Letter Template, produce a letter using Microsoft Word. Include references cited according to APA style.

Supporting Materials

2. The following resources support your work on the project:
3. Prospective Clients
4. Select one of the following prospective clients for your analysis:

Prospective Client One – Colony Bankcorp Form 10-K

Prospective Client Two – Digital Turbine Form 10-K

Prospective Client Three – WeWork Form 10-K

ACC 411 Project One Client Risk Profile Template
Directions
Select a prospective client 10-K from the Supporting Materials section of the Project One Guidelines and
Rubric. Evaluate the client through a due diligence process and identify key risk factors that could impact
the client and assess your audit team to determine if they can objectively meet the needs of the audit
for the client. Complete this template by replacing the bracketed text with the relevant information.
Key Risk Factors Identified
[Add content here]
Audit Team Assessment Results
[Add content here]
ACC 411 Project One Audit Team Due Diligence Professional Care Checklist Template
Directions
Assess your audit team to ensure the team is qualified to perform the audit. Once your checklist is
complete, you will communicate any findings from this assignment within the Client Risk Profile
Template. Consult the PCAOB Auditing Standards AS1005, AS1010, and AS1015 for guidance. Complete
this template by replacing the bracketed text with the relevant information.
Scenario
For whatever company you choose to analyze, assume you are the audit partner responsible for
assigning staff to work on that audit. Review the following facts and then assess if any of the information
raises potential red flags that might impair objectivity and independence if you assigned that person to
the audit. Document your analysis in the categories below including what action should be taken.
Staff
Robert Woods is an audit senior and a CPA. Robert is also on the board of directors of several charities,
where he interacts with some of the businesspeople in the area. One of the people he routinely works
with is the CFO of the company you are going to audit. In addition, the CFO used to work for your audit
firm within the audit practice before leaving to work for your potential client.
Alma Sanchez is targeted to be the audit manager on the engagement. Her husband, Tyr, while not
directly working with the company you are going to audit, holds a majority stake in that company. The
firm’s policy is that any person working on the engagement cannot have a direct investment, of any size,
in any audit client of the firm. Further, the person cannot have a material indirect investment in the
audit client.
Rancel Dumari is targeted to be the lead auditor on the engagement but has only worked on small,
nonprofit clients. The audit of this client requires extensive specialized knowledge related to the
company you selected. No other team members understand the industry and its unique accounting
standards and regulations.
Technical competency
[Add content here.]
Independence (lack of bias)
[Add content here.]
Professional skepticism
[Add content here.]
ACC 411 Project One Engagement Letter Template
Directions: Use PCAOB standards and what you’ve learned in the readings and content of this course to
determine what should be included within an engagement letter. Complete this template by replacing
the bracketed text with the relevant information.
Additional Information
Fees and schedule – The audit will be based on a time and materials basis with a “not to exceed”
amount of $750,000. Additionally, we will bill all out-of-pocket expenses at cost. The rates for our staff
are as follows:
• Partner – $400/hour
• Manager – $300/hour
• Senior Auditor – $200/hour
• Staff Auditor – $150/hour
The anticipated start date of the engagement is January 2, 20xx with an estimated completion date of
February 28, 20xx.
[To]
[Insert engagement letter introduction]
[Insert requirements and responsibilities of the audit in detail. Specify the objectives and scope of the
work, how long the audit will take, payment terms for work performed, client responsibilities, and
auditors’ responsibilities.]
[Insert closing statements]
[Signatures and titles from both parties]
ACC 411 Client Engagement Letter Sample
[Date]
[New Client]
RE: Employment of ______________________ by _____________________
Dear ____________________________:
Thank you for selecting _____________________________ to represent you with respect to
________________________________________________. This letter will confirm our recent discussion
regarding the scope and terms of this engagement.
Our firm has agreed to represent you for this engagement. I personally will supervise the case. However,
it is anticipated other representatives in the firm also will work on the engagement.
[Add some details here of the anticipated services and discuss any limitation on the scope of the
representation.]
[Straight hourly option, add if applicable or remove if not applicable] You have agreed to pay for our
services based on the time we spend working on the engagement. My current hourly rate is $_____ per
hour. The rates of our associates currently range between $ ______and $ ______ per hour. Accounting
Assistants, who will be utilized where appropriate to avoid unnecessary accountant fees, currently are
charged at $ _____. These rates are subject to change once a year, usually in December. Generally, you
will be billed for all time spent on your engagement, including telephone calls.
[Value added billing option, add if applicable or remove if not applicable] You have agreed to pay for
our services based on the time we spend working on the engagement, with allowance for reduction or
increase in fees under certain circumstances. My current hourly rate is $_____ per hour. The rates of our
associates currently range between $ ______and $ ______ per hour. Accounting Assistants, who will be
utilized where appropriate to avoid unnecessary accountant fees, currently are charged at $ _____.
These rates are subject to change once a year, usually in December. On occasion, time may be written
off before a statement is sent because we feel there has been some degree of inefficiency in the work,
or for other reasons. On the other hand, fees may be raised above hourly rate levels, based on the
complexity of the matter, superior results, or other factors. If applied, we will discuss any such increases
with you and believe that you will find them appropriate.
We will forward billing statements monthly. They will contain a description of services, including the
date, the person rendering the service, the amount of time involved, and a description of the task
accomplished. Monthly statements also will itemize monies we have advanced on your behalf, such as
service and filing fees, expert witness fees, court reporter fees, and charges for investigation, travel and
accommodations, telephone long distance, photocopies, and telecopies.
As discussed, our current estimate for this engagement is $ ________. [Detail items the estimate covers
and does not cover.] This estimate is imprecise as my knowledge of the facts currently is limited. We will
advise you if fees will be significantly higher than this estimate. At such a time, you may decide to
restrict the scope of our efforts, or we may make other adjustments. This estimate does not include cost
items.
You have paid the sum of $ _______ as an advance against fees and costs, which we have deposited to
our trust account. After your receipt of monthly statements, we will pay the amount of the statement
from the trust account. If any portion of the advance is unexpended at the conclusion of the
engagement, it will be refunded to you. If the advance is expended, you have agreed to pay subsequent
monthly installments upon receipt. An interest charge of one and one-half percent per month is charged
on statement balances not paid within 30 days of billing.
You will appreciate we can make no guarantees of a successful conclusion in an engagement. However,
the accountants at this firm will use their best efforts on your behalf.
[Include any special disclosures that may be appropriate, such as potential conflicts of interest, client
confidentiality issues, etc.]
My objectives are to provide you with excellent auditing services and to protect your interests in the
event of my unexpected death, disability, impairment, or incapacity. To accomplish this, I have arranged
with another accountant to assist with closing my practice and my office staff or assisting accountant
will contact you and provide you with information about how to proceed.
If this letter fairly states our agreement, will you please so indicate by signing and returning the enclosed
copy in the enclosed business reply envelope. If you have any questions or concerns, please call me to
discuss them. We greatly appreciate the opportunity to represent you for this engagement and look
forward to working with you.
Sincerely,
Accountant Name
Firm Name